Shares of UnitedHealth Group (UNH) caught fire this week amid merger talk in the health insurance space.
Fellow insurers Cigna (CI) and Aetna (AET) were also taken along for the ride, surging on heavy volume. While all three present interesting ways of playing the return of volatility and elevated speculation to the sector, UNH stock provides the best opportunity for option traders.
The first, and arguably most important, reason for zeroing in on UNH stock is it’s superior liquidity. It’s options boast the tightest bid-ask differential allowing traders to enter and exit trades with little slippage.
A second reason for favoring UNH here is its superior technical posture. While CI and AET stock have already skyrocketed well above established support levels, UNH is only now prepping to launch. The Monday-Tuesday pop in UNH shares have lifted the health insurer to a key resistance level near $122.
The strong trending stock has spent the past four months building a base which is on the cusp of completion with what could be a stellar breakout should merger mania continue to inject speculative buying into the health care space.
The past few years have been littered with successful breakouts in UNH and there’s no reason to bet the current one in the offing for the stock won’t be equally rewarding.
The third reason for today’s obsession with UNH — though it’s admittedly one shared by its peers — is the elevated implied volatility. Not surprisingly, the merger hype has increased demand for option contracts for health insurance companies across the board. The implied volatility rank has risen to 75% reflecting a fattening of option premiums.
UnitedHealth stock looks ripe for a bull put spread play. Sell the Jul $115/$110 put spread for 73 cents.
Consider it a bet UNH remains above $115 for the next month. The maximum gain is limited to the initial 73-cent credit.
The maximum loss is limited to the distance between strikes minus the net credit, or $4.27, and will be lost if UNH falls below $110.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
